Using the law as a compass to point readers in the right direction, I focus on the legal and business issues of the day as it pertains to creatives, athletes, entrepreneurs and business owners.

7.11.2014

Protecting IP in China: Taking Small Steps in the Right Direction

"It is better to take many small steps in the right direction than to make a great leap forward only to stumble backward." ~~ old Chinese proverbRight now the situation in China for intangible assets and intellectual property protections seems drastic. And yet there is so much untapped potential to grow the market and make money that it is tempting to take the risk and do business in China. Not everyone thinks that the situation has to remain dire and maybe because I'm an optimist at heart, I think Dan Harris at China Law Blog has a point:

Many companies believe that since they have done what is necessary to secure their rights in North America and Europe, there is nothing special they need to do in China. This is a mistake.

The key concept is that IP protection is local. Since all IP protection is based on local law and practice, you must adopt an effective and realistic protection program for the country in which you are operating. If you are in China, you must consider the situation in China. China is currently the most dangerous country in the world when it comes to protecting intangible assets, but that does not mean you can afford to throw up your hands and do nothing. China’s IP risks can be managed, if you realistically assess the risks and take practical steps for protection.

To protect your IP in China you must make use of the Chinese system. You must act within China for creation of rights, enforcement of rights, and monetary exploitation of rights. You must deal with China the way it is, rather than hoping to rely on a perhaps more perfect system that simply does not exist in China.

The least effective system of IP protections seems to be for creative works:

Copyright in creative works. Copyright protection in China has not worked well at protecting creative works in the retail sector. Virtually all movie, film, and music products are cheaply available in China on a wide scale in pirated form. On the other hand, copyright is effective in China for specific violations of copyright in a business to business setting. However, effective protection of copyright requires careful attention to the Chinese registration regulations. It does little good to rely on the general right of copyright for creative works.

The key is to make a risk assessment and then a realistic action plan in response:

Businesses must focus on the realistic risks within China. The risks vary depending on the type of intellectual property. The general situation is as follows.

1. If your IP has value, and if it can be copied with minimal effort, it will be copied and you should prepare for this . The following assets are particularly susceptible to copying in China:

Trademarks, trade names, and logos.

Exterior product design (design patent and copyright).

Books, photos, reports, drawings/plans — any other medium that can be photocopied and reproduced.

Any material that can be copied in digital form: music, film, CAD drawings.

2. The Chinese seldom put much effort into independent copying of inventions and other technical IP that cannot be copied easily. If intangible assets cannot easily be copied, the Chinese will usually wait to be trained by the foreign business. They will seldom appropriate foreign technology on their own initiative. As a result, the motivation of many Chinese companies that work with foreign businesses is to acquire technology, trade secrets, and know-how via training from the owner of the IP. This occurs in virtually any area where Chinese companies work with foreign businesses:

Technology licensing projects;

Joint venture manufacturing or services;

OEM manufacturing;

Product design and development agreements;

Employee training; and

Distribution and sales agreements.

American companies can not throw their hands up and simply assume they should just accept this risk and loss as a way of doing business in China:

Faced with this, many American companies simply give up and operate in China with no protection at all. This virtually always leads to disaster in China. The correct approach is to work to find an alternative form of protection. This can be achieved in many ways, including the following:

Licensing agreements;

Secrecy and non-use agreements;

Technical controls, such as encryption; and

Direct manufacture rather than OEM or joint venture.

Many American businesses think China has no IP laws and that Chinese companies do not file lawsuits. This is a mistake. Chinese companies actually tend to be quite adept at using the Chinese IP system to their own benefit, including employing the following tactics:

If the American side fails to register its intellectual property in China, a Chinese entity will register the IP in its own name. In this way, the Chinese company cuts the American company out of the American company’s own market. This happens regularly with trademarks, patents, and commercial copyrights.

Many American companies mistakenly believe that China does not have a developed IP protection system. They therefore do not adequately investigate to ensure that they are not infringing the rights of others in their operations in China. This is especially of concern when the American company hires a Chinese contractor to perform services or engages in cooperative design or manufacturing operations with a Chinese company. The American company only learns later that it has infringed on the IP of another. The resulting damages can be significant. For how this can play out on the trademark front, check out When To Register Your China Trademark? Ask Tesla.

And so as the old Chinese proverb advises better to take the small sure steps available now then to take a great leap forward into nothingness.

NOT LEGAL ADVICE (BUT HIRE ME AND I WILL GIVE YOU ALL THE ADVICE YOU NEED)

I am a lawyer specializing in the areas of sports/entertainment, business, intellectual property and nonprofits. Nothing on this blog is legal advice, it's just information and opinion. If you want legal advice and more, feel free to visit my professional website and hire me. (Fill out this short intake form for a free 15-minute consultation: HERE).